Budget 2020: Fiscal prudence and reward for effort are always in style

Given the high level of debt-funded spending contained in the federal budget, it has become fashionable to declare that we are all Keynesian economists now. ABC television presenter Leigh Sales went so far as to suggest the budget measures had shown the federal government was “dishonest and cynical” in its attacks on Labor’s response to the global financial crisis. This view reflects lazy thinking and partial knowledge rather than objective understanding. The budget does share some attributes of Keynesian economic theory in which government spending is used to boost demand during a downturn. But the conditions that flow from the pandemic are not easily compared to those of the global financial crisis. Just as the budget response outlined by Josh Frydenberg is far removed from the measures unleashed by the Rudd government with, in the case of the home insulation scheme, sometimes deadly results.

The Treasurer says the central aim of the budget is to build a bridge to the other side of the COVID-19 crisis and begin the recovery phase. He argues that comparisons with the GFC do not do justice to the scale of the financial predicament now being faced. During the GFC the global economy contracted by 0.1 per cent. This compares with OECD forecasts for the pandemic to cut the global economy this year by 4.5 per cent. Australia has performed relatively well compared with economies such as Britain and the US. Nonetheless, gross domestic product has fallen by 7 per cent in the June quarter and Australia’s net debt to GDP is forecast to peak at 44 per cent. Under the budget forecasts, the deficit will reach $213.7bn this year with net debt rising to $703bn.

The government has responded to the pandemic with measures focused on promoting jobs growth and assisting businesses to invest. Mr Frydenberg says the government’s fiscal strategy is in two parts, with spending front-end loaded. More than 90 per cent of the money being spent as part of the response will be spent across two years. It is an emergency response aimed at keeping the economy alive and creating jobs until a clearer picture can emerge on the big questions hanging over the global and national economic outlook. This includes the prospect and timing of a vaccine being developed and deployed to combat the coronavirus. This in turn will determine the speed with which international travel can resume, something vital to restoring tourism and aviation businesses badly hit by the pandemic.

The end of travel restrictions also will restore the possibility that migrants will want to call Australia home. Immigration helped to shield Australia from recession during the past few decades. Rising numbers of immigrants have provided a foundation for activity in the building sector and supported rising house prices, particularly in Sydney and Melbourne, which has flowed out nationally. Without a return to high immigration, Australia’s economic outlook is vastly different.

Immediate criticisms of the budget have been that not enough was spent on infrastructure projects and that it lacked big-ticket reforms in areas such as industrial relations. One response has been that the Morrison government’s focus has been on restoring stability so bigger reform issues can be tackled in the future. It remains to be seen whether the electoral cycle will afford the government such luxury. There are sure to be some unintended consequences from the budget, including from prioritising job support measures based on employees’ age. Mr Frydenberg says integrity test measures have been included to protect existing workers. But he says the big lesson from past recessions has been that young workers who struggle to enter the workforce face long-term disadvantage.

Unlike Labor’s response to the GFC, stimulus measures announced this week do not include wasteful spending on things such as school infrastructure that, while in some cases justified, carried over for years after the crisis had passed. Instead, this budget brings forward already announced personal tax cuts and introduces short-term employment grants. Businesses have been given access to accelerated depreciation and investment write-offs to help build resilience and capacity for the future.

If there is a common lesson from the GFC and the pandemic it is that a strong budget provides policy options. When the GFC hit, the ALP was able to draw on the budget strength left by the Howard-Costello years. The Reserve Bank was able to play its part by cutting interest rates by 425 basis points to stimulate economic activity. Mr Frydenberg says this had the same impact as pumping $100bn stimulus effectively into the economy across 12 months. When COVID-19 hit, Mr Frydenberg also had the good fortune of being able to respond with a budget near surplus thanks to years of restraint to rein in deficits. In this case, however, the low interest rate environment made it impossible for the Reserve Bank to respond in the way it had during the GFC. The reverse side of already low interest rates is the government has greater capacity to borrow to help provide the emergency measures aimed at boosting business confidence and employment.

The challenge ahead is to reduce unemployment, to get the economy firing and to maintain a focus on one day reducing debt to build a solid foundation from which to respond to shocks when they arise. The pandemic is not an excuse to justify open-ended or wasteful spending. Neither is it a reason to believe that fashionable ideas such as modern monetary theory hold a promise of a new economic paradigm as some suggest. The budget has its flaws but is a sensible document rooted in the principles of fiscal prudence and reward for effort.